Kleinheinz Capital Management is an asset manager with close to $2.0 billion under management. The firm which has a value oriented appropriately calls its flagship fund; Global Undervalued Securities fund.

The firm’s flagship fund was down a whopping 27.19% for 2011. While the S&P500 was flat for the year, the fund bogies itself against the MSCI Emerging markets index, which was down over 20% for 2011. Additionally, despite the underperformance in 2011, Kleinheinz has returned a whopping 22.3% per annum since inception close to 15 years ago.

The fund manager, John Kleinheinz, stated that most of the losses were due to hedges, which included; shorts on the major US indices, oil and the Yen.

The fund is cautiously optimistic on 2012 and has increased its net exposure. The US equity market represents the second largest net exposure for the fund.

The US presents a mixed picture with increased consumer sentiment and balance sheets’, while automobile sales showed strength.  However, headwinds include a weak housing market, a strong US dollar, taxes and regulatory uncertainty, and slower corporate earnings’ growth.

In Europe the situation remains the same, and the fund managers’ echoed similar sentiment to David Einhorn, John Burbank, and John Paulson in their recent letters, (which can be found respectively here, here and here), in terms of the situation just repeating the same cycle over and over. Europe comes up with a plan, investors get bullish, the plan does not go through or work, investors sell off, and then the cycle repeats with a new plan.

The firm is also concerned about the political appetite for solving the European crisis especially with upcoming French elections. Short positions include certain currencies in Europe, financials and Sovereign CDSs.

In regards to China, the Government has a lot of ammunition which should help the country avoid a hard landing. Valuations are very attractive and GDP growth should be strong while inflation remains at a healthy pace.

Japan is experiencing trouble on all fronts: The tsunami, floods in Thailand, the Olympus scandal and the Euro crisis have all hurt economic growth and weakened investor confidence. However despite the macro concerns, valuations are cheap and corporate earnings should recover swiftly.

The debt situation is very precarious and makes Japanese Government Bonds (JGBs) a dangerous investment. As Japan ages savings will go down further and require more Government services. The fund believes that bond yields could rise, and is short 10 year JGBs through future positions. The fund also has short positions on the yen and bought puts on the currency.

Catalysts for a decrease in JGBs include; an S&P downgrade, a large rollover of debt in April 2012, deterioration in the Eurozone or another systemic event. This thesis is very similar to the one noted by Kyle Bass in a recent letter.

The fund is bullish on large tech giants with strong balance sheets, and low valuations such as Google and Apple.  Large positions are also held in Monsanto, China Mobile LTD, Hong Kong Exchange and Clearing, Thai Union Frozen, and Major Drilling Group.

The fund is also hedging its positions with shorts on the Euro, Yen and emerging market currencies, such as the South African Rand, Indian Rupiah and Brazilian Real.